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Full impact of Brexit to hit construction prices in 2017

Construction prices are predicted to fall by as much as 6% by the end of 2018, according to Arcadis in its latest Market View. With the true impact of Brexit only likely to hit the market in 2017, continuing uncertainty could have a significant impact on an industry that was already seeing falling demand before the Brexit vote.

The Arcadis report, 2017 - Is Winter Coming? says that construction entered a technical recession in June with levels of output falling by 3% in the first half of the year. With the industrial and commercial sectors particularly sensitive to economic cycles, reduced confidence could cause a further contraction and result in growing competition amongst contractors for workload. Arcadis says that the improving post-Brexit sentiment understates the potential for a slow-down in construction investment.

Contractors could find themselves caught between a rock and a hard place, say Arcadis, with input costs rising even as demand falls away. According to Arcadis’ calculations, materials costs have increased by 6-8% in the last year, due in part to the devaluation of sterling. This poses a risk to commercial or residential projects where dollar or euro denominated expenditure could make up 20-30% of costs.

However, the extent to which this uplift will be passed onto clients will be directly affected by future workload. "Whilst the infrastructure sector is expected to continue to expand, with the National Infrastructure Delivery Plan, which outlines a £483 billion investment, remaining unchanged, demand in other private sectors such as offices, residential and retail is much less certain," say Arcadis. If falling market confidence causes clients to delay their investments, it could trigger a price correction, they warn.

Depending on the degree of slowdown, Arcadis forecasts that building prices will either stabilise at current levels or could fall by up to 5% during 2017. Current procurement activity in London, for example, suggests an increased appetite for bidding ahead of an anticipated fall in demand.

The Arcadis report predicts a construction market with a number of speeds with not all sectors being exposed to major price corrections. In the infrastructure sector, steady demand should enable suppliers to maintain price levels, however, in the high-risk prime residential sector, Arcadis anticipate that fewer contractors will be willing to bid for work.

Increased costs will continue to eat away at contractor margins, even as prices fall, says the report. At the start of 2016, only 3% of the industry’s workforce were registered unemployed, compared to an overall UK figure of more than 5%. This means that skills shortages will remain an inflationary factor, with labour input costs expected to rise by up to 6% per year in the short term.

In many sectors, say Arcadis, the balance of power is shifting to clients. Whether these clients continue to build, and how they choose to procure will have a significant impact on how the construction cycle unfolds and by how much construction prices adjust.

William Waller, market intelligence lead for Arcadis, commented: “There are significant indications that the commercial cycle has peaked in a number of sectors. Any contraction in workload is going to have severe consequences for an industry that has barely recovered from the 2008 crash. The combination of deflating construction prices and inflating input costs will impact overhead and profit levels, potentially leaving the supply chain squeezed in the middle.

“This could drive commercial behaviours where suppliers ultimately either cannot or will not endure further price deflation, and this is reflected in our forecasts. However, we need to retain some perspective. This is not another 2008.

“There are numerous different scenarios influencing the market at the moment, but the most important factor is a need to keep building. A sustained commitment to infrastructure and housing delivery will support the construction industry and deliver positive economic impact for the UK. Even with the challenges of Brexit, our view is that the UK still represents an excellent place to invest and as long as projects are deliverable and investible, they will continue to attract investment and support economic growth in the longer term.”